Business combinations – Phase II (application of the purchase method)


The IASB business combinations project has two phases.

This page deals with the second phase of the project.  Click for information about Phase I of the business combinations project.

Application of the purchase method

This involves purchase accounting procedures, including the following:

1. Issues relating to minority interest:

  • Whether a minority interest's share of goodwill should be recognised
  • Whether the purchase of a minority interest should be treated as the purchase of equity
  • Decreases in the parent's ownership interest after a business combination (both with and without loss of control)
  • Display of minority interests in the consolidated income statement or statement of changes in equity.

2. Treatment of successive share purchases

3. Issues relating to the measurement of consideration for the acquisition:

  • Measurement date for equity securities issued as consideration
  • Date of acquisition
  • Whether there should be an adjustment from a quoted market price when determining the value of a block of securities issued as consideration
  • Treatment of direct costs of the acquisition
  • Recognition and measurement of contingent consideration
  • Should businesses or other non-monetary assets exchanged for an interest in a subsidiary be accounted for at fair value at the date of the transaction or at previous carrying amounts?
  • How should any gain or loss arising on the transaction be reported?

4. Issues relating to the measurement of the identifiable net assets acquired:

  • Recognition of restructuring provisions. Specifically, whether the recognition criteria set out in IAS 37 Provisions, Contingent Liabilities and Contingent Assets, should be amended
  • Deferred revenue. This is a wider issue than recognition of items within a business combination, and this wider context will need to be borne in mind when the issue was considered
  • Income taxes. Although IASB and FASB guidance on income taxes will not be reconsidered as part of this project, the project will include the specific issue of the treatment of acquired deferred tax assets that are recognised after the business combination
  • Guidance on determining the fair value of liabilities
  • Assets expected to be disposed of
  • Contingencies of the acquired entity
  • The period in which the allocation of the fair value of the acquisition to identifiable net assets can be revised.

Certain issues excluded from Phase I of the business combinations project

These include:

  • Combinations of entities under common control
  • Combinations in which separate entities are brought together to form a reporting entity by contract only without the obtaining of an ownership interest (for example, business combinations in which separate entities are brought together by contract to form a dual listed company).
The parts of Phase II dealing with application of the purchase method and new basis accounting are being handled as joint projects with the US Financial Accounting Standards Board.


Current status of the project

This project has been completed.  The IASB issued a revised IFRS 3 Business Combinations and related revisions to IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates, and IAS 31 Interests in Joint Ventures on 10 January 2008.

The portion of this project related to the recognition and measurement of liabilities was not completed as part of this project, but effectively became a separate project.  See our summary of the IAS 37 project.


Project milestones

April 2002 Added to the IASB's agenda
30 June 2005 Exposure Drafts issued:
  • Proposed Amendments to IFRS 3 Business Combinations
  • Proposed Amendments to IAS 27 Consolidated and Separate Financial Statements
  • Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 19 Employee Benefits
Comment deadline 28 October 2005
9 November 2005 Roundtables held
10 January 2008 Revised IFRS 3 Business Combinations issued Effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009
10 January 2008 Amended version of IAS 27 Consolidated and Separate Financial Statements issued Effective for annual periods beginning on or after 1 July 2009

Correction list for hyphenation

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